The Truth About
Transparency

Over the past few years, the term transparency
has become one of the most widely used in the pharmacy benefit
management (PBM) industry. Use of the term began after plan sponsors
realized that some PBMs were playing games with rebate accounting
and pricing practices. It was a simple strategy. In fact, it was one
used by other industries. The PBM would promise artificially low or
free administration fees, but would recoup those fees by exploiting
other revenue streams related to the clients business, with, or
without, their knowledge. Recognizing that these games were costing
money  potentially lots of it  government and other plan sponsors
acted.

Several high profile lawsuits put some of the
industrys largest PBMs under the looking glass  and people didnt
like what they saw. Practices many viewed as misleading resulted in
higher costs to plan sponsors and significant profits for some PBMs,
while payers struggled to manage costs and plan members coped with
rising out-of-pocket expenses.

Part of the backlash related to these PBM
practices has led to a concerted effort to more tightly regulate
PBMs. Many of the industrys biggest opponents have pointed to the
lack of transparency as a reason for greater state regulation and
oversight. At least one state government, South Dakota, now demands
transparency from PBMs under its laws. Most significant of the
recent programs to address transparency is the landmark Medicare
Modernization Act of 2003, which includes specific language
mandating transparency for any provider of pharmacy benefit services
in the program.

While some believe that regulation will promote
transparency, others question that theory. In July, a Department of
Justice (DOJ) and Federal Trade Commission (FTC) report concluded
that competition, rather than regulation, will drive transparency
and related cost savings to plan sponsors. Indeed, it asserted that
state laws and regulations mandating transparency may result in
increased benefit costs and that a competitive environment with
private parties agreeing contractually upon the level of
transparency is more likely to preserve discounts and rebates. This
has led some analysts to note that transparency may soon become one
of the most important strategies PBMs will use to differentiate
themselves in the marketplace.

So is that it? Will all PBMs become transparent?
Perhaps not; despite the recent coverage and heightened scrutiny,
many plan sponsors may not fully understand what transparency is, or
more importantly, what it should be. There is no standard definition
of transparency  either from an industry or legal standpoint  and
one PBMs definition may differ completely from another.

Most within the industry define transparency as
the full disclosure of rebate revenue and other profits made by the
PBM through a specific client's business. But just providing
information on revenue wont give plan sponsors the full picture.
For some health plans, there are entities beyond the PBM (e.g., the
claims administrator or the provider of the transaction process)
that also take some profit in the prescription claim transactions.
Therefore, it will be difficult for some transparency regulations to
work if these entities are not also a part of the disclosure.
Another key issue involves the entity that negotiates the rebates
with the manufacturers  in some cases the PBM or in the case of
large MCOs; the MCO itself. If the MCO negotiates, is it responsible
for providing disclosure information? Under current interpretations
for transparency, the MCO may not have to make such disclosures.

Disclosure and Pass-Through Pricing

So how can plan sponsors ensure they are getting
all relevant information about their PBMs business practices?
Because of the likelihood that the true intent of transparency may
be weakened to become just a marketing buzzword, plan sponsors, with
the help of their consultant, will need to drill down to get the
complete picture as to pricing policies and strategies. Two key
areas to examine are disclosure of revenues and pass-through
pricing. While closely related to transparency, full disclosure
ensures that PBMs provide all the information necessary for a plan
sponsor to fully understand the true cost of their PBM program and
the profit margin of their PBM. For example, under a standard
transparency agreement, PBMs might not disclose the spread between
Maximum Allowable Cost (MAC) pricing obtained at retail pharmacies
versus MAC discounted costs billed to clients. Plans sponsors should
require that the PBM charges them the same discounted ingredient
cost that the PBM pays to the network retail pharmacies or at least
understand the cost impact of the mark-up.

Pass-through pricing is another key component of
a truly open approach to transparency. Under pass-through pricing,
the PBM should guarantee that direct discounts, future drug purchase
credits and performance-based credits will be passed- through to
the plan sponsor. Pass-through pricing should also be audited
annually to validate rebate payments and submissions.

Beware of Games That Some PBMs Play

While many consultants and employers are
beginning to more fully understand pass-through pricing and
disclosure, there are still games that some PBMs continue to play
that make it difficult to get a clear picture of costs. For example,
a tactic some PBMs might use is to offer pass-through pricing for
prescriptions filled at in-state pharmacies and spread pricing for
out-of-state pharmacies. The PBM will then negotiate with the
pharmacy to pay certain in-state retail pharmacy chains inflated
prices for generic drugs, and then pass through these inflated
prices to the plan. In exchange, the pharmacies will agree to accept
lower rates for the out-of-state spread plans. While providing
significant profits to the PBM, this provides little value to the
plan sponsor.

Yet another game that consultants should watch
for is when a PBM offers a certain percentage as a rebate, yet
really gets more than that amount through its agreements with the
pharmaceutical manufacturer. For example, a PBM discloses its rebate
with a particular manufacturer for a particular drug at 12%  which
is shared with or passed through to the plan sponsor according to
details disclosed in the contract. But in a separate agreement not
apparent to the plan sponsor, the PBM has negotiated with the
manufacturer a rebate of 12% along with a 3% administrative fee 
totaling 15% of the drug cost. If the agreement was for
rebates alone, 15% would be available to split with the plan sponsor
rather than the 12% that was disclosed. A PBM that engages in this
type of practice may be touting itself as transparent, but in
reality is keeping what could amount to a significant sum from the
plan sponsor. Taking this game a step further, the PBM may take the
3% that wasnt disclosed and use it to offset a more aggressive
Average Wholesale Price (AWP) that it offers to the client, and
which is actually lower than the AWP it pays to the pharmacy. This
is clearly not full disclosure, and gives the appearance of more
favorable pricing on a spreadsheet when compared to PBMs who dont
practice these types of shell games.

Its important for consultants to help their
clients become fully aware of these practices so that when comparing
PBMs, they select the one that is truly transparent and truly
provides the lowest net cost.

Questions to Ensure Real Transparency

The crux of the transparency issue must focus on
two key issues: 1) Are we getting the lowest cost and can that be
proven? and 2) Are we getting the best overall quality in terms of
outcomes and satisfaction for that cost?

Clearly this is a complex matter and one that
will continue to be an issue for consultants and their clients. Here
are questions that can be asked of PBMs, to ensure that transparency
is not just a marketing tactic  but a strategic approach to
ensuring quality, fairness and the lowest costs.

How does the PBM define
transparency?

Ensure your PBM discloses ALL revenue sources
attributable to your client's business on a negotiated schedule. In
a hypothetical situation, a large PBM covers 100,000 lives for a
health plan in the Midwest. The PBM is approached by a
pharmaceutical manufacturer who offers to pay the PBM a certain
amount if the PBM institutes a persistency program including that
health plan's members. There are two key issues: 1) The plan
sponsor should be aware of that arrangement and agree that their
members should be exposed to the program; and 2) They will also want
assurances that the drug being promoted improves quality and
cost-effectiveness better than other drugs within the category or
available generics. There should be reporting back to the client so
they are assured that this arrangement is appropriate and provides
value.

Full disclosure (all revenue related to a book
of business is disclosed including pricing and alternative
revenues).

Any fees from retail pharmacies are agreed
upon and disclosed.

Any formulary rebate administrative fees from
manufacturers are disclosed.

Will the PBM provide specific information on
rebate strategies?

Plan sponsors should ask to see a list of the 50
prescription drugs with the highest utilization among plan members
and ask the PBM for the price of the drugs with rebates and the
overall net costs for the drugs. Comparing the costs will help show
just how much savings the PBM is offering and where some charges may
be hidden. Ask to see a comparison of rebates and therapeutic value
as well as outcomes of medications. With guidance from the PBM's
clinical team, the employer can determine if the drugs recommended
provide the best overall value. But perhaps the most important point
to keep in mind is that as the industry changes, rebates should NOT
be the sole focus of the pharmacy benefit program. All programs
should be designed to ensure they provide the lowest net cost to
plan  and as generics increase and industry practices change 
rebates should become much less of focus for plan sponsors.

Is the PBM willing to share all rebate
dollars?

A PBM today should be willing to share all rebate
dollars if requested by the payer. The plan sponsor should recognize
that while rebate dollars will be shared, specific terms and
conditions of the manufacturer contracts are confidential. To help
confirm the PBM's rebate policy, and assure the client they are
securing full disclosure, the PBM should also agree to submit to an
outside independent audit to review rebate payments and
reconciliation. Some PBMs even have a Rebate Management business
unit to further ensure the integrity of all practices. One approach
plan sponsors should consider is a PBM that does not charge an
upfront rebate administrative fee and one that is willing to share
all rebates collected from manufacturers if that is the payer's
wish.

What is the PBM's philosophy on drug-specific
rebates?

While some PBMs may agree to drug-specific
rebates to secure a client's business, in the long run, such an
approach is not advisable as costs may increase and the PBM's
ability and willingness to negotiate across the entire book of
business may decrease.

Does the PBM up-charge the negotiated retail
pharmacy network rates and if so, what is the spread or margin on
those rates?

This question is not as simple as it seems.
A number of factors should be evaluated when developing pricing for
clients. In some cases, negotiated retail pharmacy network rates may
be up-charged and in others, these rates may actually be
down-charged. The key driver in the pricing should be the
client-specific utilization and mix of drugs. Whatever strategy is
used, the PBM should clearly indicate to the plan sponsor what was
done and for what purpose and be able to show that their pricing
strategy resulted in lower dispensing fees and discounted AWP.

Does the PBM negotiate for administrative
fees, in addition to rebates, from pharmaceutical
manufacturers?

If a PBM has negotiated an administrative fee in
addition to the rebate, be sure the details of the arrangement are
transparent to you and your clients. You will also want to know if
the PBM is using the administrative fees to offset what may appear
to be a more favorable AWP. To get to this level of transparency,
you will need to ask very specific questions and may have to run
the numbers. But without this degree of transparency and due
diligence, it is difficult to get a clear picture of costs and
ensure your PBM is really providing the lowest net cost to the plan
sponsor.

Am I really getting this for
free?

Plan sponsors must also take responsibility for
recognizing that the old proverb "if it seems too good to be true,
it probably is," holds true for pricing within the PBM industry as
well. A PBM may well offer to provide administration for free, but
they will have to make up those monies somewhere  likely on the
pricing or rebate side. That's where consultants play such a
critical role in helping their clients understand the need to
examine ALL elements that comprise the pharmacy benefit. Plan
sponsors can't always accurately take a spreadsheet approach and say
PBM A charges X for administration and PBM B charges XX. It is wise
to examine the total costs and ultimately the impact on net cost to
plan. It is better to pay a reasonable fee for program
administration and know that you are getting high value for the
money paid than to get free administration and not know how much the
PBM is receiving from other revenue sources.

Has the PBM been sued for lack of transparency
or unfair practices in the past?

While many in the industry believe that past PBM
practices such as hiding revenue sources or not fully disclosing
revenue sources were simply the way business was done, some PBMs
were and are still committed to transparency long before it became a
controversial issue. When reviewing PBM proposals, likely some of
those competing for your business will have been sued for disclosure
practices; still others will have no legal action and will be able
to prove their historical commitment to transparency. These PBMs
will have more credibility and experience in implementing a fully
"transparent" benefit.

Summarizing the Importance of Transparency and
Full Disclosure

For transparency to become more than a marketing
buzzword, it must be focused on ensuring that clients have a full
understanding of how the business practices of their PBMs affect not
only their pricing and rebates, but the overall quality of the
program as well. As transparency becomes a key differentiator, PBMs
will likely continue to find ways to further quantify their business
practices, creating even more value to plan sponsors. The key
to ensuring maximum value is knowledge of what to look for in a
strong transparency program and an understanding of the key
questions to ask a PBM.

In this era of escalating healthcare costs and intense scrutiny
on all facets of PBM pricing and practices, what plan sponsors
really need are pharmacy benefit programs that exemplify the
principles of knowledge, innovation and commitment. Health plans,
employers, union trusts and other plan sponsors have every right to
demand a PBM that offers the best pricing and overall programs,
without games, without empty promises and without allegiances to
outside organizations. To ensure that transparency provides real
value to clients, look for PBMs that openly communicate all relevant
sources of revenue and pricing policies, as well as the agreements
with outside organizations. That means no games; no pricing programs
that promise lower costs on one section of the benefit, while using
higher pricing elsewhere, and a dedication to the plan sponsor and
its people, not just to their own bottom line or to the
pharmaceutical industry. The result of an open approach to pricing
will be more assurances of fairness, lowest prices and ultimately a
more stable and higher quality pharmacy benefit program for your
client and their members.